Is TechStars Worth 5%?
I’ve been pleased to see that the reaction to TechStars has generally been very positive. We’ve been pleasantly overwhelmed with quality applications for the program – over 75 to date for the 10 spots. There are still 52 days to apply, so if you are thinking about it, I encourage you to give it a shot.
Of course, there has been some debate about whether or not TechStars is “worth” giving up 5% of your equity. I thought I’d take a crack at addressing this and further explaining what we are trying to do with TechStars.
The answer to this question depends on your situation. If your company is funded, or clearly worth millions today, then TechStars is probably not for you. Perhaps some people might think that their idea alone is worth millions, and so they won’t apply. I can tell you from first hand experience that your idea is not worth much until you execute in such a way that you create real value. On their own, ideas are usually not worth the napkin they’re scribbled on. I am exposed to thousands of ideas every year (and often have several each morning while I’m in the shower) – only a handful of entrepreneurs will successfully build something around their idea and create meaningful value.
Perhaps when you consider the opportunity presented by TechStars, you will calculate that the initial valuation of your company is between $100,000 and $300,000 (based on the share of equity TechStars gets for the cash it puts up.) Some entrepreneurs will naturally argue that this is a low valuation. Conversely, many investors will argue that it is quite high. In time, one will be proven right and the other proven wrong. But if you’re looking at TechStars and the only value you see is the seed funding, then you’re missing the point of what we are trying to do.
You can’t easily assign a value to what TechStars provides, but we believe it goes well beyond the value of the seed funding. The educational opportunities alone are potentially life changing. What’s the value you’d place on access to the mentors who are involved? How long will it take you to assemble the large investor audience that we’ve lined up for you to pitch to at the end of the summer? What’s the benefit of an experience like this really worth? Hopefully, the answer to each of these questions is “much more than the seed funding alone.”
The value of TechStars is even more compelling if your company will need to raise more money. You’ll be in a great position to pitch to investors at the end of the summer, due to the coaching, advice, and mentoring provided by TechStars. Investor day brings active angel investors and venture capitalists right to you, and maximizes your chances of getting further funding. Because TechStars is vested in your success, it’s in our best interest to help you obtain more funding. Our initial 5% equity will be diluted by this further financing because we don’t ask for any dilution protection, rights of first refusal, or special controlling provisions (we will have common stock, just like you.) But we’re ok with this dilution because it’s fair, equitable, and further increases your chance of success, which again, is what it’s all about for both parties.
Think of TechStars not as a source of capital, but as a co-founder that brings a little money to the table. TechStars will be successful if your startup becomes a huge success, adds value and meaning to the world, and creates wealth. In the end, your company will likely either be worth something or nothing. Once you start thinking about this in binary, you should quickly realize that the whole game is really all about improving your odds, especially early on. We think TechStars can greatly improve your chance of success.